Microsoft has outperformed the Wall Street's prediction for this quarter by whopping 11%, with its stock reaching $60 for the first time since 1999.
The company has released a report on the results of its first fiscal quarter yesterday, revealing the numbers that not many expected to see. Microsoft's (NASDAQ: Microsoft Corporation [MSFT]) revenue is at $22.33 billion with the adjusted earnings per share of 76 cents, as compared to the Wall Street's expectation of $21.7 billion in revenue and 68 cents of earnings per share, says Reuters' estimate. Net income is at $4.7 billion.
These are, indeed, some impressive results but they still cannot compete with what the MSFT stock showed in yesterday's after-hours trading session. The shares jumped 6%, smashing its all-time high value of $59.97, and settled at slightly above $60. This is the first time Microsoft's stock reached that high since the company's heyday in 1999, reports MarketWatch. The tech giant's executives attribute this quarter's success to the top performance of the cloud-based products and Azure, the company's main cloud offering, in particular.
According to the quarterly report, revenue coming from Azure surged 116%, with the product's compute usage more than doubling from the same period of last year. Microsoft's Azure is the main competitor of Amazon's Web Services, that is why Azure's impressive performance that pushed Microsoft's overall cloud revenue up 8% to $6.4 billion, is definitely a competitive statement towards Amazon (NASDAQ: Amazon.com [AMZN]). At the moment, Amazon, the pioneer in offering cloud-related services, owns 31% of the market whereas Microsoft's Azure comes second with an 11% share, reports the Wall Street Journal. However, the rapid growth of Azure could be a sign that Microsoft's hefty investments in building data centers supporting the cloud-computing services are finally paying off.
“Our first quarter results showed continued demand for our cloud-based services. We continue to invest, position ourselves for long-term growth, and execute well across our businesses,” said Amy Hood, the Chief Financial Officer and Executive Vice President of Microsoft.
The analysts say that this quarter's results clearly show Microsoft's ability to benefit from the challenging shift to cloud and digital, which is a huge transformation for the company coming from the early days of computing in the 90's. Even though cloud-based services are the Microsoft's new "hot" direction, the majority of the company's business is still coming from the "traditional" computer software. And that part of the business didn't perform that well this quarter, showing a 1.8% decline and generating only $9.3 billion in revenues. At the same time, the online version of Microsoft Office, Office 365, has shown a 51% revenue growth and saw the number of its users growing to 24 million, the company said in the statement.
Another important point in developing the cloud-based services for Microsoft this quarter was securing a major partnership with Adobe (NASDAQ: Adobe Systems [ADBE]). Two tech giants agreed to collaborate in the cloud space with Adobe calling Azure its "preferred cloud platform" for its Adobe Marketing Cloud, Creative Cloud and Document Cloud services. Whereas Microsoft will use Adobe Marketing Cloud as a "preferred marketing service".
Next to that, the experts say that the cloud services are not the only reason behind Microsoft's successful quarter. Only last month, Microsoft announced its plans for yet another stock repurchase program for a total amount of about $40 billion with no expiration date while the company is still in the process of completing its previous $40 billion buyback from last year. CNBC says if this shares repurchase is approved and no part of these shares is reissued, this would be one of the biggest buybacks of the last 10 years.
MarketWatch analysts say that even though share repurchasing can significantly boost the company's earnings per share, it is often a sign of an inability to grow by any other means. But, unfortunately, it is not that much of a rare phenomenon in the tech sector. Fortune mentions Apple (NASDAQ: Apple [AAPL]) and Microsoft to be among the biggest re-purchasers of the sector, with Apple spending $13.3 billion on share buybacks in the Q3 of last year.
“Financial engineering such as buybacks to achieve growth tends to suggest that the best years are over for a company and that it is late in the cycle of its success. Although Microsoft initially had a good run with Nadella, growth is declining and this level of buybacks combined with insider selling is concerning,” said David Santschi, CEO of a research company TrimTabs, as reported by Fortune.
Therefore, investors have all the reasons to be happy with Microsoft's fiscal Q1 performance, as it seems like the painful switch to the cloud-based offerings is finally gaining momentum. However, with such powerful competitor in the field as Amazon, Microsoft's Azure will be challenged to sustain the top performance over many quarters to come.